Cotton Sees ‘Exodus of Traders’ as Volatility, Margins Rise

Nov. 30 (Bloomberg) -- Cotton-futures trading plunged to a
15-week low last week as prices extended their decline from a
record and headed for the biggest monthly drop since January,
exchange data show.

Open interest, or the number of futures contracts yet to be
closed, liquidated or delivered, tumbled 5.2 percent to 194,995
in the week ended Nov. 23, the lowest since Aug. 10, the U.S.
Commodity Futures Trading Commission said yesterday. A week
earlier, the drop was 14 percent, the most since June 2008.

“An exodus of traders from the market is feeding this
volatility,” said Keith Brown, the president of Keith Brown &
Co., a brokerage in Moultrie, Georgia. Brown estimates that 20
percent of his customers aren’t interested in trading cotton.

Prices on ICE Futures U.S. in New York have plunged 24
percent since touching $1.5195 a pound on Nov. 10, the highest
since the commodity began trading 140 years ago. Cotton for
March delivery closed yesterday at $1.1576. The exchange
increased margins, or the minimum deposit, required for cotton
trading on Nov. 9 after prices and volatility surged.

“Margin levels are determined by volatility and by
price,” with volatility playing the more significant role, said
Lee Underwood, a spokesman for ICE.

Cotton futures have fallen by the exchange limit eight
times in November, and risen by the limit seven times. The fiber
still is up 53 percent this year on concerns that mounting
demand in China, the largest user, will outpace shrinking
inventories. Prices have dropped after China stepped up efforts
to cool inflation and curb commodity speculation.

‘Fickle Market’

“You can’t have any confidence whatsoever when the market
is as fickle as it is right now,” Mike Stevens, an independent
trader in Mandeville, Louisiana, said in an interview on Nov.
23. “We see our customers frustrated,” said Stevens, who
clears trades through Chicago-based Rosenthal Collins Group LLC.

Long positions held by hedge funds and other large
speculators have fallen 31 percent since the end of September to
54,629 contracts, and short positions fell 51 percent to 17,517
last week, CFTC data show.

“Part of that is just people getting out and saying ‘I’m
staying out,’” Brown said. By January, the contract for March
delivery may rise to $1.5195, the record set earlier this month,
as bullish fundamentals “kick back in,” he said.

Production in the U.S., the world’s largest exporter, is
forecast to jump by more than 50 percent to 18.42 million bales
in the year that ends in July, the U.S. Department of
Agriculture said. Plantings are predicted to grow to 11.04
million acres next year, while wheat and feed grain areas may
decline, the USDA said in a report on Nov. 9.

Fewer Inventories

Stockpiles held in warehouses monitored by ICE have tumbled
92 percent since June, dropping as low as 8,910 bales on Oct. 8,
down 99 percent from this year’s high of 1.08 million bales on
June 2, exchange data show.

There’s been “less participation, less confidence in the
market,” said Ron Lawson, a managing director at Logic
Advisors, a commodity consultant in Sonoma, California.
“There’s reluctance on the part of some of the participants,
some guys have opted just to step back a while.”

“We would be shying away from it with the market
conditions as they are now,” said Robert Humphreys, the chief
executive officer of shirtmaker Delta Apparel Inc. in
Greenville, South Carolina. Hedging is more expensive and
traditional methods for protecting against price changes have
been “thrown out the window,” he said.

Raising Shirt Prices

Earlier this month, Delta, the owner of Fun-Tees Inc. and
sportswear-maker MJ Soffe Co., said it plans to charge more for
clothing because of soaring cotton costs. Delta uses about
150,000 bales a year, primarily from U.S. growers, Humphreys
said on Nov. 24.

In March 2008, cotton rallied to 92.86 cents, before
tumbling 26 percent to as low as 69.02 cents later that month.
As the cotton industry shrank, after the worst recession since
the 1930s, some merchants sought bankruptcy protection and filed
for insolvency.

The recent run-up in prices is different than in 2008, when
“you could point your finger and blame speculators,”
independent analyst Stevens said. This time, “the cash market
has kept up with the futures market,” he said.